Note 10 — Regulation and Rates

Transmission ROE

Two complaints were filed with FERC seeking to reduce the ROE component of the transmission rates that MISO transmission owners, including Cleco, may collect under the MISO tariff. As of September 30, 2018, Cleco Power had $2.1 million accrued for potential ROE reductions, including accrued interest. For more information on the ROE complaints, see Note 12 — “Litigation, Other Commitments and Contingencies, and Disclosures about Guarantees — Litigation — Transmission ROE.”

FRP

Cleco Power’s annual retail earnings are subject to an FRP that was approved by the LPSC in June 2014. Under the terms of the FRP, Cleco Power is allowed to earn a target ROE of 10.0%, while providing the opportunity to earn up to 10.9%. Additionally, 60.0% of retail earnings between 10.9% and 11.75%, and all retail earnings over 11.75%, are required to be refunded to customers. The amount of credits due to customers, if any, is determined by Cleco Power and the LPSC, annually. Credits are typically included on customers’ bills the following summer, but the amount and timing of the refunds is ultimately subject to LPSC approval. Cleco Power will file an application with the LPSC for a new FRP by July 1, 2019, with anticipated new rates being effective July 1, 2020.

Cleco Power must file annual monitoring reports no later than October 31 for the 12-month period ended June 30. On October 31, 2017, Cleco Power filed its monitoring report for the 12-month period ended June 30, 2017, which indicated that no refund was due as a result of the FRP and $1.2 million was due as a result of the cost of service savings from the Merger Commitments. Cleco Power expects the LPSC to approve the 2017 FRP monitoring report in the fourth quarter of 2018. The $1.2 million cost of service savings from the Merger Commitments were refunded in September 2018.

On October 31, 2018, Cleco Power filed its monitoring report for the 12 months ended June 30, 2018, which indicated no earnings-related refund and $1.2 million of cost of service savings refunds are due to be returned to eligible customers. This amount was accrued at September 30, 2018.

SSR

In September 2016, Cleco Power filed an Attachment Y with MISO requesting retirement of Teche Unit 3 effective April 1, 2017. MISO conducted a study which determined the proposed retirement would result in violations of specific applicable reliability standards for which no mitigation is available. As a result, MISO designated Teche Unit 3 as an SSR unit until such time that an appropriate alternative solution can be implemented to mitigate reliability issues. One mitigating factor that has been identified is Cleco Power’s Terrebonne to Bayou Vista Transmission project. In January 2018, another study was performed by MISO, and it was determined that Teche Unit 3 would continue to be designated as an SSR unit. Cleco Power’s first SSR agreement was for the period April 2017 to March 2018, and the second SSR agreement is for the period April 2018 until the sooner of the in-service date of the Terrebonne to Bayou Vista Transmission project or March 31, 2019. The Terrebonne to Bayou Vista project is expected to be complete in the second quarter of 2019.

Cleco Power filed an application with FERC for approval to collect $20.3 million and $11.8 million annually in SSR payments from MISO for the first and second SSR agreements, respectively. In the second quarter of 2017, Cleco Power began receiving the monthly SSR payments from MISO, subject to refund. Also in the second quarter of 2017, MISO began allocating SSR costs to the load serving entities that require the operation of the SSR unit for reliability purposes, including Cleco Power. The SSR payments include recovering operations and maintenance expenses, administrative and general expenses, taxes, depreciation, capital expenditures, and carrying charges, all of which are related to Teche Unit 3 for the period of the SSR agreements. At the end of the SSR period, if Teche Unit 3 is retired, any SSR payments received from MISO for capital expenditures paid by third parties will be credited to property, plant, and equipment. At the end of the SSR agreement, Cleco Power will have the option to rescind the Attachment Y. If this option is exercised, Cleco Power will be required to refund recoverable capital expenditures. As of September 30, 2018, Cleco Power had $4.5 million accrued for SSR payments received for capital expenditures related to Teche Unit 3.

In July 2017, Cleco Power, FERC Staff, and intervenors met at a settlement conference related to Cleco Power’s SSR agreements. Cleco Power has responded to multiple sets of informal data requests from FERC Staff and intervenors. A second settlement conference was held in February 2018; however, a settlement was not reached. In September 2018, the parties drafted a settlement term sheet that is expected to resolve all issues in this proceeding. As a result of the settlement, Cleco Power recorded a $2.0 million decrease in Other operations revenue for expected refunds to MISO for a reduction in SSR payments and a $1.0 million decrease in Power purchased for utility customers for Cleco Power’s portion of allocated SSR costs.

TCJA

On February 21, 2018, the LPSC directed utilities, including Cleco Power, to provide considerations of the appropriate manner to flowthrough to ratepayers the benefits of the reduction in corporate income taxes as a result of the TCJA. Cleco Power filed comments with the LPSC on March 12, 2018, which included among other things, a refund to customers for the differences in the cumulative federal and state income tax rate of 38% prior to the TCJA, versus the 26% cumulative federal and state income tax rate effective after the TCJA. As a result, Cleco Power began accruing an estimated reserve for the change in the tax rate beginning January 1, 2018. At September 30, 2018, Cleco Power had $22.7 million accrued for the estimated federal tax-related benefits from the TCJA. On October 5, 2018, the LPSC Staff issued a final report and proposed rule that would require utilities to adjust formula rates the earlier of January 31, 2019, or the next date required for implementation of compliance rate changes under the normal operation of the FRP. All utilities must file a report with the LPSC by December 1, 2018, describing its methodology for TCJA refunds and related items, including the allocation of such refunds among jurisdictional customers. The final rule was approved by the LPSC on October 26, 2018. Cleco Power expects to file its application with the LPSC no later than December 1, 2018. Rates are anticipated to go into effect the month following LPSC approval. Cleco Power expects to refund the amount accrued for the change in the tax rate based on July 2018 usage, after LPSC review and approval. Cleco Power expects to address the regulatory liability for excess ADIT resulting from the enactment of the TCJA in Cleco Power’s application for its new FRP, which will be filed by July 1, 2019, with anticipated new rates being effective July 1, 2020.